Thursday, March 7, 2013

Legendary investor Stanley Druckenmiller recently came out of the shadows and gave a rare interview on a myriad of topics. Given the popularity of that post, we thought it'd be interesting to see what lessons we could learn from this great investor so we looked at Druckenmiller's interview in Jack Schwager's book The New Market Wizards to see what we could learn.

Druckenmiller formerly ran hedge fund Duquesne Capital as well as George Soros' Quantum Fund, and he saw annual average returns of 30% since 1986. He managed around $12 billion before shutting down Duquesne.

A few years ago, he returned Duquesne outside capital and now runs a family office. Many of his former employees founded PointState Capital with money from Druckenmiller and former Duquesne investors.

On achieving a superior track record: "George Soros has a philosophy that I have also adopted: The way to build long-term returns is through preservation of capital and home runs ... The way to attain truly superior long-term returns is to grind it out until you're up 30 or 40 percent, and then if you have the convictions, go for a 100 percent year."

On what he's learned from George Soros: "Perhaps the most significant is that it's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong ... Soros has taught me that when you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig ... As far as Soros is concerned, when you're right on something, you can't own enough."

On when to take more risks: "Many managers will book their profits when they're up a lot early in the year. It's my philosophy, which has been reinforced by Mr. Soros, that when you earn the right to be aggressive, you should be aggressive."

On analyzing companies: "I particularly remember the time I gave (the research director) my paper on the banking industry. I felt very proud of my work. However, he read through it and said, 'This is useless. What makes the stock go up and down?' That comment acted as a spur. Thereafter, I focused my analysis on seeking to identify the factors that were strongly correlated to a stock's price movement as opposed to looking at all the fundamentals. Frankly, even today, many analysts still don't know what makes their particular stocks go up and down."

On using both valuation and technicals: "I never use valuation to time the market. I use liquidity considerations and technical analysis for timing. Valuation only tells me how far the market can go once a catalyst enters the picture to change the market direction. The catalyst is liquidity, and hopefully my technical analysis will pick it up."

Learning from mistakes/Trading stories: The book has too many great stories to list, but one of the main lessons Druckenmiller learned is that you can be right on a market/trade and then still lose your ass if excessive leverage is involved.

Druckenmiller tells numerous stories involving Soros and Paul Tudor Jones. These tales are really remarkable, including
one where he was 130% long the day before the 1987 stock market crash, yet
he still was up for that month due to his ability to quickly recognize his error, minimize losses, and reverse his positioning.

Definitely pick up the classic book The New Market Wizards if you haven't read it, as it's full of wisdom from Druckenmiller as well as other traders/investors.

Legendary hedgie Michael Steinhardt, now the Chairman of WisdomTree, sat down with CNBC for an interview today. Here's some comments from his talk:

Michael Steinhardt's Latest Interview

On his investor personality: "I have an innate inclination towards bearishness, that's the way I am. We each have our own personality and character composition and mine is tended toward the bearish side."

On whether investors should wait for a pullback in the market after the big run-up: "I'm not sure it's going to stop, but I think that one must marvel at where the stock market is in relation to the rest of world, in relation to the economics, the politics... it's not a glorious happy time."

On where he's putting money these days: "I have a number of stocks which are mostly specialized itsy-bitsy things. I own, I was Chairman of a company called Genie Energy (GNE)."

On his average net long exposure: "I managed money for 29 years, and my average exposure in my funds for those 29 years was between 30-35% net long, now that's probably as bearish as anybody was in that period. I think having lower risk is a virtue. I'm not sure I'm a perma-bear."

When asked if he's very long right now, he replied "no, no I'm not."

Jim Chanos of Kynikos Associates was also in the media room during the interview and he noted that Steinhardt is one of the best short sellers there is.

Embedded below is the video of Michael Steinhardt's interview with CNBC:

Steve Cohen's hedge fund SAC Capital recently filed a 13G with the SEC regarding shares of AnnTaylor Stores (ANN). Per the filing, SAC has revealed a 5.3% ownership stake in the company with 2,582,551 shares.

This marks a massive increase in the number of shares they've owned since the end of 2012. They previously owned 544,451 shares.

Per Google Finance, AnnTaylor Stores is "a specialty retailer of women’s apparel, shoes and accessories sold
primarily under the Ann Taylor and LOFT brands. The Company’s Ann Taylor
and LOFT brands offers a range of career and casual separates, dresses,
tops, weekend wear, shoes and accessories."

Kynikos Associates founder and notorious short-seller Jim Chanos appeared on CNBC this morning to share his latest thoughts on the market:

On China: He says to avoid the Chinese property bubble. While he's been short various plays on this in China, he says he's "broadening out" to plays like construction equipment, etc.

On Dell (DELL): Chanos notes that he's been short Dell on heels of the buyout proposal. He was originally short a while ago and covered his position in the single-digits but ended up re-shorting the company recently on the heels of the deal. We've highlighted how Chanos has been short PC's before.

He points out that the company's cashflow is plummeting and he thinks it's going to drop more. "The problem with the Dell model is you get paid upfront. That's a great model when your business is growing... but as your business shrinks, it works the other way."

On Herbalife (HLF): He was short last year, but is not anymore. He says, "We were short, at a price. I'm not crazy on these multi-level marketing businesses." It sounds like he covered as shares were cut in half.

On 'smart guy syndrome' and importance of doing your own work: "One thing we teach our analysts is when they look at the company, they should be looking at fundamentals, and not the personalities involved because it's easy to stop doing fundamental work when you say 'oh, Mr. XYZ is in it so if he sees something in it, who am I to argue?' In every corporate disaster over the last 30 years, there's been a handful of smart guys in everyone of them. We're not all right all the time."

David Faber over at CNBC reports that according to "trading sources," Carl Icahn has taken around a 6% stake in Dell (DELL). Additionally, according to recent SEC filings, he's proposing some changes at Transocean (RIG) as well.

Icahn Jumps into Dell

Dell of course has an offer on the table to go private from founder Michael Dell and private equity firm Silver Lake that has seen opposition from some of its largest shareholders, including Southeastern Asset Management.

Icahn is reportedly expected to oppose the deal and has apparently built up a stake close to 100 million shares. It seems that he favors a leveraged recapitalization.

Here's the letter Icahn sent to the special committee of Dell's board:

"We are substantial holders of Dell Inc. shares. Having reviewed the Going Private Transaction, we believe that it is not in the best interests of Dell shareholders and substantially undervalues the company.

Rather than engage in the Going Private Transaction, we propose that Dell announce that in the event that the Going Private Transaction is voted down by shareholders, Dell will immediately declare and pay a special dividend of $9 per share comprised of proceeds from the following sources: (1) $4.26 per share, or $7.4 Billion, from available cash as proposed in the Going Private Transaction, (2) $1.73 per share, or $3 Billion, from factoring existing commercial and consumer receivables as proposed in the Going Private Transaction, and (3) $4.26, or $5.25 Billion in new debt.

We believe that such a transaction is superior to the Going Private Transaction because we value the pro forma “stub” at $13.81 per share using a discounted cash flow valuation methodology based on a consensus of analyst forecasts. The “stub” value of $13.81 combined with our proposed $9.00 special dividend gives Dell shareholders a total value of $22.81 per share, representing a 67% premium to the $13.65 per share price proposed in the Going Private Transaction. We have spent a great deal of time and effort in determining the $22.81 per share value and would be pleased to meet with you to share our analysis and to understand why you disagree, if you do.

We hope that this Board will agree to adopt our proposal by publicly announcing that the Board is committed to implement our proposal if the Going Private Transaction is voted down by Dell shareholders. This would avoid a proxy fight.

However, if this Board will not promise to implement our proposal in the event that the Dell shareholders vote down the Going Private Transaction, then we request that the Board announce that it will combine the vote on the Going Private Transaction with an annual meeting to elect a new board of directors. We then intend to run a slate of directors that, if elected, will implement our proposal for a leveraged recapitalization and $9 per share dividend at Dell, as set forth above. In that way shareholders will have a real choice between the Going Private Transaction and our proposal. To assure shareholders of the availability of sufficient funds for the prompt payment of the dividend, if our slate of directors is elected, Icahn Enterprises would provide a $2 billion bridge loan and I would personally provide a $3.25 billion bridge loan to Dell, each on commercially reasonable terms, if that bridge financing is necessary.

Like the “go shop” period provided in the Going Private Transaction, your fiduciary duties as directors require you to call the annual meeting as contemplated above in order to provide shareholders with a true alternative to the Going Private Transaction. As you know, last year’s annual meeting was held on July 13, 2012 (and indeed for the past 20 years Dell’s annual meetings have been held in this time frame) and so it would be appropriate to hold the 2013 annual meeting together with the meeting for the Going Private Transaction, which you have disclosed will be held in June or early July.

If you fail to agree promptly to combine the vote on the Going Private Transaction with the vote on the annual meeting, we anticipate years of litigation will follow challenging the transaction and the actions of those directors that participated in it. The Going Private Transaction is a related party transaction with the largest shareholder of the company and advantaging existing management as well, and as such it will be subject to intense judicial review and potential challenges by shareholders and strike suitors. But you have the opportunity to avoid this situation by following the fair and reasonable path set forth in this letter.

Our proposal provides Dell shareholders with substantial cash of $9 per share and the ability to continue as owners of Dell, a stock that we expect to be worth approximately $13.81 per share following the dividend. We believe, as apparently does Michael Dell and his partner Silver Lake, that the future of Dell is bright. We see no reason that the future value of Dell should not accrue to ALL the existing Dell shareholders – not just Michael Dell. As mentioned in today’s phone call, we look forward to hearing from you tomorrow to discuss this matter without the need for us to bring this to the public arena. Very truly yours, Icahn Enterprises L.P. By: Carl C. Icahn Chairman of the Board"

Icahn Proposes Dividend & New Directors at Transocean

Icahn also has revealed a stake in Transocean (RIG) earlier this year with 20,154,035 shares back on January 29th. He just recently filed an amended 13D with the SEC to show that he will propose a $4 dividend per share to be paid in 4 equal installments, to elect 3 new directors, and to propose a repeal of the company's staggered board.

Icahn writes,

"I am proposing the $4 dividend because I believe that a high dividend payout ratio is the only way that Transocean will consistently employ a disciplined and sensible approach to capital allocation. Over the past several years, in my opinion, the Company has conducted ill-advised mergers, employed unsuccessful development strategies and squandered the substantial cash flow generated by the business. Now, it appears to me, the Board and management would like to take the Company’s substantial cash flow and use it to achieve three goals: the massive repayment of the company’s low coupon debt, the aggressive new build growth locked up with low return contracts, and the payment of a meager dividend to shareholders.

I believe that the inability of Transocean to grow and pay down debt is a function of poor capital allocation which has driven the share price to below net asset value. Once the capital allocation problem has been solved, in my opinion, Transocean will have access to yield hungry investors to finance growth and acquisitions on attractive terms.

I believe that to permanently repair the failed capital allocation strategy, shareholders of this Company must replace the directors who have been the architects of this failed strategy, including the Chairman. The directors that I have chosen have substantial experience in the creation and issuance of non-traditional yield structures, driving shareholder returns through capital allocation, and managing and growing large corporations both internationally and in the energy sector. If these nominees are elected, which I expect they will be, I truly believe it will serve shareholders well."

Corporate raider and general rabblerouser Carl Icahn is absolutely
everywhere these days. It's almost as if he sees a situation escalating
and jumps in to take it up a notch. He's submitting SEC filings practically every few days (not an exaggeration).

He's jumped into Herbalife (HLF) and is a long versus Bill Ackman's HLF short, Icahn's proposing changes at Transocean (RIG), and now he's jumped into the Dell (DELL) ring as well. We'll have to wait and see what his next target will be.

The following is a guest post by Tsachy Mishal of TAM Capital Management who presents the bull case on Crimson Wine Group (CWGL) which was recently spun-off from Leucadia National (LUK). Tsachy also runs the blog, Capital Observer.

Crimson Wine Group: A Unique Spin-off Opportunity

Crimson Wine Group (CWGL) is a unique spin-off opportunity. Crimson Wine was separated from Leucadia National Corp (LUK) prior to its acquisition of Jefferies. The stated reason for the spin-off is as follows:

“Jefferies has advised Leucadia that Jefferies’ management deemed Crimson as less strategically relevant than Leucadia’s other subsidiaries, ascribing a value to Crimson no greater than approximately its book carrying value. As such, in assessing and negotiating the terms of the transaction with Leucadia, Jefferies’ management advised Leucadia that Jefferies viewed the pre-transaction divestiture of Crimson through the Leucadia winery business separation an efficient and desirable method of divesting Crimson, as compared with a post-transaction sale or other divestiture. It was therefore agreed between Jefferies and Leucadia that that the separation occur prior to consummation of the transactions, without reducing the book value of Leucadia by more than $197 million and that it be effected without Leucadia retaining any material liability with respect to Crimson.”

My interpretation of this is that there was a disagreement about the value of Crimson between Jefferies and Leucadia. Jefferies did not believe Crimson was worth more than stated book. That would imply that Leucadia management believed it was worth more than stated book value since they decided to spin this off. If Leucadia management were willing to accept stated book as the valuation than there would be no reason for the spin.

Leucadia management owns a significant portion of the company with Chairman Ian Cummins owning 8.7% of the shares and Joseph Steinberg owning 9.7% of the shares. I believe it is significant that they felt it important to carve out this asset rather than to allow it to be valued at book value. This is especially important because this asset only makes up about 2% of the combined company. If it were worth anywhere close to stated book it would hardly be worth it to spin this off.

It is also worth noting that Leucadia management is in a much better position to value these assets as they have owned some of them for over twenty years. The Jefferies position is understandable in the context of a large financial company. Pro forma for the deal, Crimson would represent approximately 2% of book value. Financial companies are generally valued based on book value. It is unlikely given how small Crimson is relative to Leucadia that the market would ascribe value above book. So even though Leucadia thought it was worth much more than book, Jefferies thought they would never get credit for it in a large financial company.

Valuation

There are two ways to tackle the valuation of Crimson. The first is by book value and the second is through earnings power. I will attempt to do both starting with book value. Below is the pro forma balance sheet given by Crimson. Stated book value is $7.82:

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ASSETS

Current assets:

Cash and cash equivalents

21,329

Accounts receivable, net

5,287

Inventory

41,487

Other current assets

663

Total
current assets

68,766

Property and equipment, net

108,485

Goodwill

1,053

Other intangible assets, net

20,403

Total

198,707

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LIABILITIES

Current liabilities:

Accounts payable

857

Accrued expenses

5,393

Customer deposits

1,178

Total
current liabilities

7428

Total
liabilities

7428

EQUITY

Common shares, par value $1 and $.01 per share

245

Additional paid-in capital

277,176

Retained deficit

-86,142

Total
equity

191,279

Total

198,707

Breakdown of Wineries

Crimson Wine Group is in the winery business and owns several vineyards. Crimson lists the value of its property and equipment on its balance sheet as $108,485, which includes the vineyards it has acquired. Crimson has acquired its vineyards over twenty plus years. The land is listed at cost even though the price has appreciated materially. Below is a breakdown of the value of their vineyards:

Pine Ridge Archery Summit - Pine Ridge and Archery Summit are Crimson Wine Groups most valuable wineries. Pine Ridge Vineyards was acquired in 1991 and has been conducting operations since 1978, Archery Summit was started in 1993. In 2001 they were put on the market by Leucadia for $150 million as seen in this Wine Spectator article. Napa Valley winery prices trade at record prices and at significantly higher prices today than they did in 2001. I believe that this property is worth at least $150 million.

Seghesio Family Vineyards- Seghesio was acquired for $86 million in May 2011.

Chamisal Vineyards- Chamisal acquired for $19.2 million in August 2008.

Double Canyon- Crimson acquired 611 acres in Horse Heaven Hills, Washington for an undisclosed price in 2005 and 2006. A conservative estimate of their land and equipment there is $10,000,000.

The table below summarizes the value of Crimson’s wineries:

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Winery

Value

Pine Ridge Archery Summit

$150,000,000

Seghesio Family Vineyards

$86,000,000

Chamisal Vineyards

$19,200,000

Double Canyon

$10,000,000

Total

$265,200,000

By assigning a value of $265 million to Crimson’s property & equipment and zero value to its intangible assets the book value becomes $326.3 million or $13.34 cents a share.

By looking at Crimson’s past earnings it is difficult to justify the current price. For the first nine months of 2012 Crimson reported 19 cents of pro forma earnings. However, the future outlook is brighter as earnings are set to ramp up.

Crimson has been significantly increasing production in recent years. Between 2009 and 2012 it increased production from 117,000 cases to 296,000 cases. At the same time gross margins have increased from 23% to 52%. This increase has followed production increases in a relatively straight line as Crimson moves to much higher levels of capacity utilization. Revenue per case has been between $185 and $235. After bottoming in 2011 at 185, revenue per case increased again in 2012 as a result of greater contribution from Seghesio which has a higher than average ASP. During the same period opex has consistently grown slower than sales.

The Form 10 discloses that in 2013 they will be able to increase production by 58,000 cases at Chamisal and 50,000 at Seghesio. This leads to total production of 404,000. Assuming revenue per case of $195 and a slower than historical ramp in gross margins to 55%, this leads to net income of nearly $17 million. Net income is equal to EBIT because they have no debt and NOLs shield them from cash taxes. Cash flow will generally be better than net income as maintenance capex is half of D&A.

I estimate that Crimson will earn 70 cents in EPS in 2013 and roughly 79 cents in free cash flow per share. There are two pure play wine companies, Treasury Wine and Concho y Toro. They trade at an average of 20 times 2013 earnings estimates and 14.5 times FCF. Based on these valuations CWGL would be worth $14 on an EPS basis and $12.25 on an FCF basis (once one adds back $22.3 million in net cash). That works out to an average of $13.13, not far from my $13.34 estimate of tangible book value. It is important to remember that CWGL is under earning because its capacity utilization is low.

Conclusion

Crimson Wine Group has all the ingredients of a successful spin-off. The company has savvy management with a large ownership interest, the stock is too small for institutions to hold and there is no sell side following. From the current price of $7.78 the stock has roughly 70% upside to a conservative valuation.

The author is long shares of CWGL. Under no circumstances does this constitute investment advice. Under no circumstances does this information represent a recommendation to buy, sell or hold any security. The information is for educational purposes only. Positions may change at any time without notice.

Lee Cooperman, founder of hedge fund Omega Advisors sat down with CNBC this morning to share his thoughts on the market.

Is the Market Fairly Valued?

"Bernanke's told us everyday since 2009 that he wants higher inflation, more economic growth, lower unemployment, he wants to create high stock prices to create wealth, to create consumption ... you have to ask yourself as a money manager: has he gotten the market to a zone of overvaluation?"

Cooperman thinks the market is now fairly valued and he thinks every bull market ends at overvaluation. He concluded that, "So the market's still ok, but it's not a bargain anymore."

On Stocks With Yield

He says he has around 90 holdings and touched on how investors are looking for yield, so he highlighted some of his positions that fit this mold:

- KKR Financial (KFN): 7.4% yield, growing 5% a year
- Chimera (CIM): accounting issues that he thinks will be resolved this year
- Atlas Pipeline (APL): 7% yield, growing
- Linn Energy (LINE): good yield and growing
- Transcoean (RIG): 4.2% yield and notes Carl Icahn's presence in the name as well

He made an interesting comment on yield as well, saying: "Almost half the S&P 500 right now yield more than bonds."

Growth Stocks He Likes

Cooperman also rattled off some of the stocks he likes that fit under the growth category: Express Scripts (ESRX), Google (GOOG), and Qualcomm (QCOM).

On Short Selling

Cooperman was asked about Herbalife (HLF) and short selling in general. He does not have a position in the company but made these comments about shorting: "It's not a wise thing to publicize your short position, and I would not publicize being short 20% of a company."

He also went on to say: "I have no problem with short selling, I think short selling adds some discipline to the market.

Monday, March 4, 2013

Coatue Management's founder Philippe Laffont appeared on Bloomberg TV today to talk about tech stocks, including Apple (AAPL), Google (GOOG), and others.He says that tech stocks are 'historically cheap' and he's always on the lookout for the new trends.

On Apple (AAPL)

"It’s cheap by any measure. The key is not to think whether stock will be up $50 in the next few months. The key is what would it take for Apple to get to $800. It would be a great return if just from today it went back to $600. To me, the company has to take back the offense. The company has been a little bit put on defense. Samsung and Google have been very strong competitors... at some point Apple is going to take back the offense."

Laffont was asked why he is still bullish on the name and while Coatue still owns shares, our Hedge Fund Wisdom newsletter flagged that the hedge fund sold 55% of its AAPL stake at the end of 2012 so that's worth keeping in mind. They've been a long-term bull on the name.

Laffont wants to see the company make product moves and make better use of cash, saying:

"The company is so big that how they use the cash is going to determine value, there’s no way about it. But there are going to be some new products coming in. I think they have some things up their sleeve."

Coatue reportedly hosted AAPL's CFO at their investor day earlier this year. Laffont hinted that AAPL should make some acquisitions as well as he wants the company to bring on some new talent and ideas.

On Google (GOOG)

Laffont thinks the tech giant could be a triple in 5-7 years from now, trading at just 5x earnings.

On Storage & "The Cloud"

He sees storage as a long-term trend as data continues to move to the cloud. One of his largest investments in public markets is datacenter provider Equinix (EQIX). Coatue has recently started making private investments and Box.net was one of their first (another play on this trend).

Talking Other Tech Companies

He also commented on how there's a new 'four horsemen' of tech: Google, Apple, and Amazon.com (AMZN), original members of the group remain, but he would add Samsung and Twitter to that bunch. He says Twitter has huge strategic value, but little revenue so it's hard to value. On Facebook (FB), Laffont feels that in an increasingly mobile world, advertising is a lot harder.

On Tech Value Traps & Shorts

The Coatue manager went on to note that while many investors in other sectors look for bargains and 'cheap stocks,' tech isn't necessarily the best place to do that because a lot of times in this sector these cheap stocks are actually value traps. He listed Hewlett Packard (HPQ), Microsoft (MSFT), and Intel (INTC), citing a rising mobile computing world.

He also mentioned his firm was exploring a concept on the short side he called a 'paperless office' where people are all using iPads and people don't need/use paper as much. He says that, "A lot of the companies stuck in the desktop/printer world are going to have a tough time going forward."

On Media & Content

Laffont's content theme focuses on smartphones and how everyone will have one eventually and want to consume content on those devices (citing Netflix (NFLX), HBO Go, ESPN). He thinks the world will move towards content being monetized in very different ways. He said he likes Time Warner (TWX), CBS (CBS), and News Corp (NWSA).

Dan Loeb's hedge fund firm Third Point is out with its latest exposure report and they were up 1.2% for February and are up 6% year-to-date.

New Positions Revealed

The major news in their portfolio is newly revealed positions in Virgin Media (VMED) and EADS in Europe. Virgin Media is set to be acquired by Liberty Global (LBTYA) so this is now a merger arbitrage play.

They did not own a stake at the end of 2012 so all buying has been done in 2013. And they certainly did a lot of buying as VMED is now their second largest position. We've also detailed how Philippe Laffont's Coatue Management has been a big owner of VMED (and they also own LBTYA as well).

Third Point's position in European Aeronautic Defence and Space Company (EADS) was listed as a 'top winner' for the month and this is the first time this position has appeared on their sheet. The Dutch based company is listed in the French stock market and Third Point hasn't had to file with regulators there since it's a large cap and they haven't crossed the ownership thresholds. So, it's hard to say when they actually initiated the position.

Thomson Reuters' data also lists Andreas Halvorsen's Viking Global as holding 1.44% of shares (although it appears as though they've been selling rather than buying recently.)

In terms of equity exposure, Third Point is now 47.3% net long. This is an increase from the month prior as they were 37.8% net long in January. One sector they are now net short is healthcare (-0.6%).

Their top winners last month included Morgan Stanley (MS) and Herbalife (HLF). Their investment theses on both stocks were detailed in Third Point's Q4 letter.

Third Point is 27.1% net long credit, -9.4% and net short macro trades (largely government securities it looks like).

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